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Risk Aversion in a Dynamic Asset Allocation Experiment

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  • Brocas, Isabelle
  • Carrillo, Juan D.
  • Giga, Aleksandar
  • Zapatero, Fernando

Abstract

We conduct a controlled laboratory experiment in the spirit of Merton (1971), in which subjects dynamically choose their portfolio allocation between a risk-free and risky asset. Using the optimal allocation of an investor with hyperbolic absolute risk aversion (HARA) utility, we fit the experimental choices to characterize the risk profile of our participants. Despite substantial heterogeneity, decreasing absolute risk aversion and increasing relative risk aversion are the predominant types. We also find some evidence of increased risk taking after a gain. Finally, the session level risk attitudes show a different profile than the individual descriptions of risk attitudes.

Suggested Citation

  • Brocas, Isabelle & Carrillo, Juan D. & Giga, Aleksandar & Zapatero, Fernando, 2019. "Risk Aversion in a Dynamic Asset Allocation Experiment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(5), pages 2209-2232, October.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:05:p:2209-2232_00
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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